The Reform Act requires domestic issuers to provide shareholders with the right to cast a non-binding vote approving the issuer's executive compensation as disclosed in its proxy statement at least once every three years. The say-on-pay vote covers the compensation of the issuer's named executive officers as disclosed in the annual proxy statement. The proposed rules did not provide for a specified format or wording for the say-on-pay proposal but do require issuers to disclose in the proxy statement that they are providing a separate shareholder vote on executive compensation and briefly explain the general effect of the vote.

The Reform Act provides that the say-on-pay vote must be held at least once every one, two or three years. Shareholders must also be given the opportunity, at least once every six years, to have a separate shareholder vote to re-determine the frequency of the say-on-pay vote. The proposed rules did not provide for a specified format or wording for the say-on-pay vote, but do require issuers to state that they are providing a separate shareholder advisory vote on the frequency of the say-on-pay vote and briefly explain the general effect of the vote. If an issuer's board of directors includes a recommendation on the frequency of the vote, the proxy statement must clearly state that shareholders are voting to approve the actual frequency and not the board of directors' recommendation. The proposed rules specify a format for the proxy card with respect to the frequency vote.

The Reform Act adds new disclosure requirements for payments made to named executive officers in connection with certain change in control transactions. Proposed new Item 402(t) to Regulation S-K specifies a tabular format for this disclosure. The aggregate dollar values of the following elements of compensation separately must be quantified in the seven columns of the table:

For disclosure made in connection with a corporate transaction, the amounts in the table are generally quantified assuming that the transaction occurred on the latest practicable date and using the closing price of the common stock on that date.

The Item 402(t) table is to be accompanied by narrative and footnote disclosure describing:

The proposed rules expand the list of transactions set forth in the Reform Act in which disclosure is required to include proxy and consent solicitations, registration statements on Forms S-4 and F-4, going private transactions, third-party tender offers and similar transactions.

The proposed rules require issuers to provide a separate shareholder advisory vote on the arrangements described pursuant to Item 402(t). The golden parachute vote is only applicable for proxy and consent solicitations and not the additional transactions described above. The golden parachute vote is only required for compensation paid by the target issuer to its named executive officers.

Compensation and arrangements are not subject to the golden parachute vote if they were subject to a prior general say-on-pay vote. In order to take advantage of this exemption, an issuer must have voluntarily included disclosure regarding the change in control arrangements in its annual meeting proxy statement in accordance with Item 402(t). In the event that compensation arrangements that were not subject to a prior say-on-pay vote were in place at the time of a transaction, issuers would need to segregate the required disclosure in two tables meeting the requirements of Item 402(t) showing the total amounts payable under all arrangements and just those new arrangement subject to the current vote.

Click here for more information on the proposed rules.

A Roth contribution is a type of contribution that an employee can make to a 401(k) plan, up to the limits permitted by the US Internal Revenue Code. With a Roth contribution, the employee irrevocably designates the deferral as an after-tax contribution that the employer deposits into a designated Roth account. The amount of the designated Roth contribution is included in the employee's gross income at the time the employee would have otherwise received the amount in cash.

Earnings on Roth contributions are not included in income when distributed from the plan in a qualified distribution. A qualified distribution is generally a distribution that is made approximately five years after the employee's first Roth contribution and is either:

Employees receiving a distribution from a 401(k) plan can transfer (a "rollover") the entire amount of the distribution (including contributions that were not Roth contributions) to an individual retirement account referred to a Roth IRA. Any amount not previously taken into income prior to the rollover is taken into income in the year of the rollover. Thereafter, the amount held in the Roth IRA is not subject to income tax at the time of distribution, as long as the distribution is a qualified distribution.

With the availability of In-Plan Roth Rollovers, participants in 401(k) plans can now realise the benefits of a rollover to a Roth IRA while keeping their money in the 401(k) plan. Moreover, In-Plan Roth Rollovers should reduce the leakage from 401(k) plans to Roth IRAs.

Implementation in 2010 of In-Plan Roth Rollovers is primarily dependent on the plan's record keeper. Some plan sponsors may not be able to offer In-Plan Roth Rollovers in 2010, due to the lead time necessary to modify the record keeping system to accommodate In-Plan Roth Rollovers.

Plans not currently permitting Roth contributions face another roadblock to a 2010 implementation of In-Plan Roth Rollovers. A 401(k) plan cannot permit In-Plan Roth Rollovers unless the plan is amended to permit Roth contributions. In that case, it is unlikely that they could be made effective in 2010, given the system modifications necessary to implement Roth contributions.

Plan sponsors that do implement In-Plan Roth Rollovers, whether in 2010 or later, may want to consider additional amendments that will increase the availability of In-Plan Rollovers to plan participants. For example, sponsors of 401(k) plans that do not allow all of the in-service withdrawals permitted by the Internal Revenue Code could amend their plans to expand the in service withdrawal options. The plan can condition eligibility for the additional withdrawal options on a participant's election of an In-Plan Roth Rollover. For example, if a plan sponsor amends its plan to permit age 59½ withdrawals, it appears the amendment could be limited to only those participants making an In-Plan Roth Rollover.

Participants who complete In-Plan Roth Rollovers in 2010 will be eligible for special tax treatment. The special tax rule provides that, if an employee takes an in-service withdrawal or distribution in 2010 from a US tax-qualified plan and rolls that money into a Roth IRA or, for a withdrawal or distribution from a 401(k) plan, into an In-Plan Roth Rollover, that withdrawal or distribution is treated as if 50% were made in 2011 and the remainder is made in 2012 (unless the employee elects to have the amount included in 2010 income). Since In-Plan Roth Rollovers are subject to income tax, the ability to make this election may be an important benefit for certain employees, especially in light of the possible increase in tax rates.

For more information on In-Plan Roth Rollovers, click here.

TCI 2 revolved around competing plans of reorganization for Trump Entertainment Resorts, Inc.'s Atlantic City casinos. A plan filed by Beal Bank, as first lien lender, and Icahn Partners (Beal/Icahn Plan) sought to convert all first lien debt into 100% ownership of the reorganized debtors and provided the second lien noteholders with no recovery (TC1 2, at 131). An ad hoc committee of second lien noteholders and the debtor filed a competing plan (AHC/Debtor Plan) pursuant to which, among other things, US$225 million in cash from a rights offering would be contributed in exchange for 70% of the common stock in the reorganised debtors. Holders of second lien notes and general unsecured claims could subscribe for this stock (another 20% was set aside as a fee for the investors backstopping the rights offering). The AHC/Debtor Plan proposed to pay the first lien lenders a combination of cash and a restructured secured loan bearing a market interest rate.

The class of first lien lenders voted against the AHC/Debtor Plan, meaning that it could not be confirmed unless the first lien lender class could be crammed down under section 1129(b) of the Bankruptcy Code. The first lien lenders objected on the grounds, among other things, that the AHC/Debtor Plan violated the intercreditor agreement between the first lien lenders and second lien noteholders. They argued that section 1129(a)(1) of the Bankruptcy Code (11 U.S.C. §1129(a)(1) ("The court shall confirm a plan only of all of the following requirements are met: (1) The plan complies with the applicable provisions of this title.")) prohibits confirmation of a plan that does not comply with the Bankruptcy Code, and that "Bankruptcy Code section 510(a) specifically provides that contractual subordination agreements, such as those commonly found in intercreditor agreements, are enforceable to the same extent as it would be under applicable nonbankruptcy law" (In re TCI 2 Holdings LLC, Case No. 09-13654 (Bankr. D.N.J.), Objection to Confirmation of Plan, Docket No. 1238 at p. 88). They alleged that the intercreditor agreement did not allow the second lien noteholders to receive any proceeds of shared collateral unless the first lien lenders were paid in full in cash. The AHC/Debtor Plan allegedly violated this provision of the intercreditor agreement because the first lien lenders would be paid over time, meaning that the second lien noteholders would receive distributions before the first lien lenders were paid in full in cash (TCI 2, at 139). The first lien lenders also argued that the AHC/Debtor Plan recharacterised adequate protection payments as principal payments on the first lien debt, thereby violating a provision of the intercreditor agreement that prohibited second lien noteholders from objecting to or contesting adequate protection payments made to the first lien lenders (TCI 2, at 139).

Several days before the confirmation hearing, the first lien lenders sued the second lien lender plan proponents in New York state court seeking a declaratory judgment and damages for alleged breach of the intercreditor agreement (TCI 2, at 140). The proponents of the AHC/Debtor Plan removed the action to federal court and sought to transfer it to the Bankruptcy Court, while Beal sought remand to state court.

Section 1129(a) of the Bankruptcy Code sets out the requirements for chapter 11 plan confirmation. Section 1129(b) of the Bankruptcy Code applies only when the relevant provisions of section 1129(a) have been satisfied, except that a class has voted (or has been deemed to vote) against a chapter 11 plan. Section 1129(b) requires that the plan not "discriminate unfairly" and be "fair and equitable" with respect to the non-accepting class.

The TCI 2 court began its analysis by citing the introductory phrase of Bankruptcy Code section 1129(b), "[n]otwithstanding section 510(a) of this title." The court had not located any decision analyzing this phrase, which "arguably subverts a prepetition subordination agreement between creditors" (TCI 2, at 140). The court concluded that in light of the meaning of the word "notwithstanding", the only logical reading of the provision was the following:

In other words, section 1129(b) overrides any requirement that a consensual plan, confirmed under section 1129(a), honor the provisions of an intercreditor agreement. The court made no determination of whether the intercreditor agreement was violated "but even if such a violation occurred, it would not impede the confirmation of the AHC/Debtor Plan as proposed" (TCI 2, at 141).

The TCI 2 court did not, though, leave Beal/Icahn without a remedy. The court sustained Beal's objection to the provisions of the second lien noteholder plan that would have released the first lien lenders' rights under the intercreditor agreement, including the claims asserted in the lawsuit pending in New York.

It was not lost on the TCI 2 court that its ruling could create an "anomalous result", whereby senior creditors could be prevented from agreeing to something under section 1129(a) that could be imposed on them under section 1129(b) (TCI 2, at 140-41 (citing Kenneth N. Klee, Adjusting Chapter 11: Fine Tuning the Plan Process, 69 Am.Bankr.L.J. 551, 561 (1995))).

As noted above, sections 510(a) and 1129(a)(1) of the Bankruptcy Code, taken together, appear to require enforcement of a subordination agreement outside the context of cramdown. But a plan of reorganisation could alter the rights of a creditor group under an intercreditor agreement and that creditor group could vote, as a class under Bankruptcy Code section 1122, to accept such a plan. With respect to that class, cramdown would not be necessary. But, an individual member of that accepting class could object to the plan as violating the intercreditor agreement and, therefore, unconfirmable under sections 1129(a)(1) and 510(a).

Accordingly, a class of senior creditors may not be able to waive enforcement of an intercreditor agreement in a plan they accept over the objection of a non-accepting member of that class.

But the inclusion of the words "notwithstanding section 510(a) of this title" in section 1129(b) suggests that an entire class of senior creditors that rejects a plan because it does not respect an intercreditor agreement may nonetheless find that plan forced upon them via cramdown. This could create the result that a majority, accepting class of creditors cannot voluntarily override an intercreditor agreement in a consensual plan under section 1129(a) even though that result can be imposed on that class, despite their unanimous opposition, under section 1129(b). The TCI 2 court "understood" this possibility, but Congress had not amended the Bankruptcy Code "to specifically permit a consensual plan to override § 510(a), nor deleted the reference to § 510(a) in § 1129(b)(1)" (TCI 2, at 141). Accordingly, the phrase "[n]otwithstanding section 510(a) of this title" in section 1129(b)(1) must be given meaning.

The TCI 2 decision, therefore, imposes potentially significant limits on senior lenders' rights. TCI 2 deals primarily with the questions of subordination, but there is reason to believe that its reasoning will be cited, where a cramdown plan is proposed, to challenge adequate protection payments, 363 sales or other basic bankruptcy rights asserted by senior lenders. Under this reasoning, senior lenders bear an increased risk that in a cramdown a plan may violate their intercreditor agreements. This may, in turn, lead to junior creditor groups challenging exclusivity under Bankruptcy Code Section 1121(d) in order to pursue cramdown plans that alter an intercreditor agreement.

It also is not clear whether the remedy that the Beal/Icahn group had left (pursuing an action in a non-bankruptcy court to enforce the intercreditor agreement) would succeed. Under the Supremacy Clause of the US Constitution (U.S. Const. article V1 clause 2 ("The Constitution, and the Laws of the United States…shall be the Supreme Law of the Land; …anything in the Constitution or Laws of any state to the contrary notwithstanding.")) and the doctrine of pre-emption, the question of whether section 1129(b) overrides the intercreditor agreement has not been resolved. The TCI 2 court did not address whether section 1129(b) of the Bankruptcy Code, a federal statute, would pre-empt the senior lenders' rights to enforce that agreement.